Back-to-School Reminder for Parents and Students: College Tax Credits for 2014 and Years Ahead

Education costsWith another school year now in full swing, the Internal Revenue Service today reminded parents and students that now is a good time to see if they will qualify for either of two college tax credits or any of several other education-related tax benefits when they file their 2014 federal income tax returns.

In general, the American opportunity tax credit and lifetime learning credit are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer and his or her spouse and dependents. The American opportunity tax credit provides a credit for each eligible student, while the lifetime learning credit provides a maximum credit per tax return. Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. Claimed on Form 8863, these credits are available to all taxpayers — both those who itemize their deductions on Schedule A and those who claim a standard deduction.

For those eligible, including most undergraduate students, the American opportunity tax credit will generally yield the greater tax savings. Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school.

Both credits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. Neither credit can be claimed by a nonresident alien, a married person filing a separate return or someone claimed as a dependent on another person’s return.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year (Jan. 31, 2015 for calendar year 2014). This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to Form 8863 and Publication 970 for details on properly figuring allowable tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified educational expenses paid during the entire tax year for a certain number of years:

  • The credit is only available for 4 tax years per eligible student.
  • The credit is available only if the student has not completed the first 4 years of postsecondary education before 2014.

Here are some more key features of the credit:

  • Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
  • The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
  • Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Also, the lifetime learning credit does not provide a benefit to people who owe no tax.

Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

  • Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
  • The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  • Income limits are lower than under the American opportunity tax credit. For 2014, the full credit can be claimed by taxpayers whose MAGI is $54,000 or less. For married couples filing a joint return, the limit is $108,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $128,000 or more and singles, heads of household and some widows and widowers whose MAGI is $64,000 or more.

You can use the IRS’s Interactive Tax Assistant tool to help determine if you are eligible for these benefits. The tool is available on IRS.gov. Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

  • Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Student loan interest deduction of up to $2,500 per year.
  • Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY U.S. TAX ADVICE CONTAINED IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED IN THIS COMMUNICATION.

New IRS YouTube Video Provides Tips on Health Care, Tax Returns

doctorThe Internal Revenue Service announced the availability of several new YouTube videos to help taxpayers get important information about the Affordable Care Act and tax return filing.

The new videos, which are part of a series on the IRS YouTube channel, feature IRS Commissioner John Koskinen discussing the premium tax credit and the individual shared responsibility provision. These provisions of the Affordable Care Act will affect people’s tax returns next year when they file their 2014 returns.

In the video about the premium tax credit, the Commissioner talks about how it can help make purchasing health care through the Health Insurance Marketplace more affordable for people with moderate incomes.

“You can get advance payments of the premium tax credit paid directly to the insurance company to lower your monthly premium, or you can apply for the premium tax credit when you file your tax return for 2014,” Koskinen said.

In the video about the individual shared responsibility provision, Koskinen discusses important facts about coverage requirements, coverage exemptions and the individual shared responsibility payment. He covers who must make a payment, who is eligible for exemptions, and what people need to do when filing their tax return.

“For most people, filing their returns in the spring of 2015 is going to be fairly simple – with regard to this issue, and that is they’ll simply check a box indicating that they have qualifying insurance or they’ll indicate that they’re eligible for an exemption. Otherwise, they’ll calculate their shared responsibility payment and add it to their tax return,” Koskinen explained in one segment of the video.

IRS videos explaining the premium tax credit, the individual shared responsibility provision, and the small business health care tax credit are on the IRS Health Care video playlist. Additional videos about the Affordable Care Act will be available soon.

Health care videos are among those available on the IRS YouTube channel. Taxpayers have viewed IRS videos nearly 8 million times.

More information on the tax provisions of the Affordable Care Act is available at IRS.gov/aca, where you can also find Health Care Tax Tips. You can also subscribe to IRS Tax Tips to get these easy-to-read tips by e-mail from the IRS.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY U.S. TAX ADVICE CONTAINED IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED IN THIS COMMUNICATION.

2012 Individual Income Tax Returns Complete Report Now Available

Legal books #7On August 22, 2014, the Internal Revenue Service announced the availability of their report, Statistics of Income – 2012 Individual Income Tax Returns Complete Report (Publication 1304).  This report contains complete individual income tax data.  The statistics are based on a sample of individual income tax returns, selected before audit, which represents a population of Forms 1040, 1040A, and 1040EZ, including electronic returns.

U.S. Taxpayers filed 144.9 million individual income tax returns for tax year 2012.  This number is down 0.3 percent from 2011.  The adjusted gross income less deficit reported on these returns totaled 9.1 trillion dollars.  This is an increase of 8.7 percent when compared to the prior year.

The report is based on a sample of 144.9 million individual income tax returns filed for tax year 2012, and provides estimates on sources of income, adjusted gross income, exemptions, deductions, taxable income, income tax, modified income tax, tax credits, self-employment tax, and tax payments.

Classifications include tax status, size of adjusted gross income, marital status, age, and type of tax computation.  A brief text reviews the requirements for filing tax returns, explains the changes in tax law, and describes the sample used to produce the report.  The report is available for review and download at the following location in the IRS’s official website:

http://www.irs.gov/uac/SOI-Tax-Stats-Individual-Income-Tax-Returns-Publication-1304-(Complete-Report)

For more information about these data, one may write to the Director, Statistics of Income Division, RAS:S, Internal Revenue Service, 1111 Constitution Avenue, K-Room 4122, Washington, D.C 20224

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY U.S. TAX ADVICE CONTAINED IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED IN THIS COMMUNICATION.

IRS Taxpayer Bill of Rights Now Available in 6 Languages

Biology Book Shows Education And LearningOn August 12, 2014, the IRS announced that the “Taxpayer Bill of Rights” is now available in six languages.  The current version of Publication 1, Your Rights as a Taxpayer, is now posted on www.IRS.gov.  The available languages include: English, Spanish, Chinese, Russian, Korean and Vietnamese.  By making this important publication available in multiple languages, the hope of the IRS is to increase the number of Americans who know and understand their rights under the tax law.

Not only is the Taxpayer Bill of Rights now available in multiple languages, but the newest revision also takes the multiple existing rights embedded in the tax law and groups them into ten broad categories.  This makes them easier to find and understand.

The Taxpayer Bill of Rights contains the following 10 provisions:

  1. The Right to be Informed;
  2. The Right to Quality Service;
  3. The Right to Pay No More Than the Correct Amount of Tax;
  4. The Right to Challenge the IRS’s Position and to Be Heard;
  5. The Right to Appeal an IRS Decision in an Independent Forum;
  6. The Right to Finality;
  7. The Right to Privacy;
  8. The Right to Confidentiality;
  9. The Right to Retain Representation;
  10. The Right to a Fair and Just Tax System.

The IRS has created a special section within the website, www.IRS.gov, to highlight these 10 rights.  Similarly, the website will be continuously updated as more information becomes available.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

IRS Repeats Warning About Phone Scams

fraud, scam, theftThe Internal Revenue Service and Treasury Inspector General for Tax Administration (“TIGTA”) are still receiving complaints from taxpayers about unsolicited calls from people claiming to be from the IRS and demanding payment.  The TIGTA has identified approximately 1,100 victims who have lost a total of $5 million from these scammers.

Here are a few things taxpayers should know about the IRS that can help you recognize a scam:

  • The IRS will NEVER ask for credit, debit or prepaid card information over the phone;
  • The IRS will NEVER insist that you use a specific type of repayment to pay tax obligations;
  • The IRS will NEVER request immediate payment over the phone and will not take enforcement action immediately after a phone conversation.

Taxpayers who receive these calls may be told that they owe money that must be paid immediately or that they are entitled to a large refund.  If unsuccessful the first time, scammers may call back and try a different method.

Here are some other typical characteristics of a scam:

  • Scammers will use fake names and IRS badge numbers. The names are usually common;
  • Scammers may know the last four digits of you social security number;
  • Scammers are able to make the caller ID appear as if the IRS toll free number is calling;
  • Scammers occasionally send bogus IRS emails to support their bogus phone calls;
  • Scammers will add background noise to simulate the sound of a call center;
  • Scammers will threaten the potential victim with jail time or suspending their driver’s license. Similarly, another scammer will call back shortly after hanging up and pose as the DMV or local police; and the caller ID may be masked to support their claims.

If you receive a phone call from someone claiming to be from the IRS, here are some simple steps you can take:

  • If you know you owe taxes, or you think you might, call the IRS at 1-800-829-1040. The IRS employees at that line can help you with a payment issue if there is one;
  • If you know you don’t owe taxes, or you have no reason to think that you owe any taxes, then call and report the incident to the TIGTA at 1-800-366-4484;
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of the complaint.

Taxpayers should also be aware that there are other types of telephone scams and solicitations that claim to be from the IRS, such as debt relief or lottery sweepstakes.

The IRS encourages taxpayers to be vigilant against email and telephone scams.  The IRS does not initiate contact with taxpayers via electronic media, including email, text messages or any social media source.  The IRS will always contact taxpayers with official correspondence sent through the mail.  People who receive such emails should not open any links contained in the message.  Instead, forward the email to phishing@irs.gov.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Tax Season Opens Today!

time for taxesThe Internal Revenue Service will begin accepting electronically filed individual tax returns today (Jan. 31, 2014) to officially open the 2014 filing season.  The IRS encourages taxpayers to use e-file as one of the fastest way to receive refunds.

The delay in the opening date for individuals was required to allow the IRS adequate time to program and test its tax processing systems.  The annual process for updating IRS systems saw significant delays in October following the 16-day federal government shutdown.

“Our teams have been working hard throughout the fall to prepare for the upcoming tax season,” then IRS Acting Commissioner Danny Werfel said on December 18, 2013.  “The late January opening gives us enough time to get things right with our programming, testing and systems validation.  It’s a complex process, and our bottom-line goal is to provide a smooth filing and refund process for the nation’s taxpayers.”

The April 15 tax deadline is set by statute and will remain in place.  However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Numbers for use in 2013 Returns

New 1040 Return imageEvery year, the IRS adjusts many of the common tax deductions for inflation.  Among these are the standard deduction for each filing status, the personal exemption allowance, and the maximum allowable Earned Income Credit for qualifying families.  For the tax year 2013, the agency has also added a new tax rate for those who earn $400,000 or more in a single year.

Deduction limits for 2014

The most common deductions and credits used by taxpayers include the personal exemption, the standard deduction, and the Earned Income Credit.  For 2013, the updated amounts for these deductions and credits are as follows:

  • The personal exemption allowance will go up to $3,900 per person.  This is an increase of $100 over the previous tax year.
  • The maximum amount of Earned Income Credit available to families with three qualifying children will be $6,044.  This amount is available to couples who file a joint return and whose income falls within the middle of the income threshold for the credit.
  • The standard deduction for the 2013 tax year will also go up.  Married couples filing a joint return will be eligible for a standard deduction of $12,200, while single filers will be eligible for a standard deduction of $6,100.

2013 Tax Table Rates

Most of the tax rates are unchanged for 2013, but the IRS has added a higher rate for those who earn more than $400,000 each year.  The tax rates are as follows:

  • 10 % – for income of up to $17,850 for married couples filing jointly; $8,925 for single filers; $12,750 for head of household filers
  • 15% – for income of up to $72,500 for married couples filing jointly; $36,250 for single filers; $48,600 for head of household filers
  • 25% – for income of up to $146,400 for married couples filing jointly; $87,850 for single filers; $125,450 for head of household filers
  • 28% – for income of up to $223,050 for married couples filing jointly;  $183,250 for single filers; $203,150 for head of household filers
  • 33% – for income of up to $398,350 for married couples filing jointly; $398,350 for single filers; $398,350 for head of household filers
  • 35% – for income of up to $450,000 for married couples filing jointly; $400,000 for single filers; $425,000 for head of household filers
  • 39.6% – for income of $450,000 and over for married couples filing jointly; $400,000 and over for single filers; $425,000 and over for head of household filers

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

The Sales Tax Deduction

Money percent sales tax

The sales tax deduction is one of the little-known deductions available to individuals.  Because taxpayers must choose between claiming the sales tax deduction or the state income tax deduction, most tend to claim their state taxes.  In some cases, though, claiming the sales tax deduction may result in a lower tax bill.

 What sales taxes can be deducted?

 The IRS allows taxpayers to claim any sales tax they pay in their home state for any reason.  All you need to do is keep records of all your sales tax receipts during the year so that you can provide documentation to the IRS in case of an audit.  This deduction can be particularly beneficial to those who live in states where there is no income tax.

 Claiming the sales tax deduction may even be advisable for those who could claim the state income tax deduction.  Since taxpayers won’t have to include their state income tax refund as taxable income if they don’t deduct the tax paid, using the sales tax deduction instead of the state tax deduction may save mo-ney in the long run.

 Claiming the sales tax deduction

 To calculate the amount of your sales tax deduction, you can either add up your total sales tax paid during the year or you can use the IRS sales tax calculator to approximate the amount of tax you paid based on your purchases.

 Because the sales tax deduction is reported on Schedule A, you’ll have to itemize your deductions in order to use it.  For most taxpayers, it’s only advisable to itemize deductions if your total deductions are higher than the standard deduction for your filing status.  Be sure that you calculate your return using both the standard deduction and your itemized deductions and then choose the method that gives you the highest refund.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

New for 2013: The Net Investment Income Tax

New for 2013: The Net Investment Income Tax

The 3.8% Net Investment Income Tax (“NIIT”) was passed as part of the 2010 Affordable Care Act.  It went into effect on January 1, 2013 and it applies to investment income only.  The IRS has released extensive proposed regulations detailing the application of the NIIT.  The basics are below.

Does the NIIT apply to your investment income?

The big question is: Will you have to pay the NIIT on your investment income?  The tax applies when taxpayers’ modified adjusted gross income (“MAGI”) exceeds certain thresholds.

For 2013, the MAGI thresholds are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for all other filers.  To find out if you are subject to the tax, you can calculate your MAGI by adding your earned income and your investment income.  Deduct the appropriate threshold from this total and then compare it to your net investment income.  The 3.8 percent NIIT will be due on the smaller amount.

Paying the Medicare surtax – Tax Preparation

Taxpayers who are subject to the tax must complete Form 8960 “Net Investment Income Tax – Individuals, Estates, and Trusts” and submit it along with their tax returns.  On the draft version of the form released by the IRS, individuals will compute their total investment income and then deduct applicable expenses to arrive at net investment income.

Individuals will compare their MAGI amount to the threshold based on their filing status.  If the MAGI amount is higher than the threshold, they will then compare it to their total net investment income.  They will pay 3.8% of the smaller amount as the NIIT.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

IRS Announces 2014 Filing Season Delay

Internal Revenue ServiceThe IRS announced today that the 2014 tax return filing season will be delayed 1-2 weeks to allow adequate time to program and test tax processing systems following the 16-day federal government closure.  The originally scheduled starting date for the 2014 tax filing season was January 21, 2014.  Based on a 1-2 week delay, the IRS expects to start accepting and processing 2013 individual tax returns no earlier than January 28, 2014 and no later than February 4, 2014.  For the complete announcement from the IRS, click here.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.